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Saturday, April 21, 2012

Keeping an Honest Eye on the Tax and Budget Debate

The Center for Budget and Policy Priorities (CBPP) has a very interesting Facebook page. It contains the Top 10 Tax Charts. The first is a pie chart showing how we spend our US tax dollars. If the chart is viewed in proper context it is interesting to note that Social Security, the non-veterans government health programs and the US defense budgets are all about the same size slice of the pie. Each is about 20% of total federal spending. But to put this chart in context it is important to remember a comparison of total spending is based on total revenue. This revenue includes our dedicated payroll taxes which fund Social Security and government healthcare programs, such as Medicare. Defense spending, and all other federal spending, are funded separately from income tax alone. Some politicians would like us to forget these separate funding streams when looking at this chart because doing so masks the true proportion of our income taxes that we spend on defense. If we were to take the same information above but chart only federal income tax spending the chart looks very different. Below we now see that defense spending is more that a third (35%) of every income tax dollar. Interest on the national debt is ten cents of every income tax dollar. So when congress talks about cutting the budget, this is a better representation of what they are addressing.

Defense spending in the United States is already all out of proportion to what every other major nation on earth spends. Our spending goes well beyond what we actually need for defense. Current spending levels give the US a huge offensive capacity, perhaps making us a dangerous nation in the eyes of the world. Mother Jones recently published a number of charts on defense spending that showed just how out of line we are compared with other nations. Couple this with the fact that despite our huge defense spending, federal income tax rates are the lowest they have been in almost half a century. The CBPP highlighted this in another "top" chart (below).

And what are the sources of this decline in Federal Income tax revenue? The CBPP offers on possibility in the next chart that tracks a sharp decline corporate income taxes (see below). The oil industry alone receives $7,610 in tax break per minute. That's over over $4 billion per year. According to a newly released report by the GAO, corporate tax breaks reduce US government revenue by $1.1 trillion annually.

A second major reason why federal income taxes are historically low is because our progressive tax structure has been systematically dismantled and the highest income brackets have been eliminated such that a person making several hundred thousand dollars in income pays the same low rate as someone making several billion dollars a year. This collapse of the progressive income tax in primarily responsible for the huge wealth disparity we see today. (For more on wealth disparity click here.) The recently proposed Ryan budget plan would further dismantle the progressive tax structure which has been in place since 1913. This point is best illustrated in a prior post entitled A 99 YEAR HISTORY OF TAX RATES IN AMERICA . Keep in mind that in addition to collapsing the progressive tax rate Congress changed the rules so that capital gains are no longer considered ordinary income as it was for most of our tax history.

A third factor leading to a decline in federal income tax revenue is the growing underground economy. A recent report by the Congressional Research Servicefound that the tax gap created by unreported cash income is in the range of $400 to $540 billion dollars annually.

The point that emerges from all of these charts and data is that any talk of reducing income tax spending by Congress should include reducing defense spending relative to other funding priorities and include honest discussions as to how we can raise income tax revenues without adding any additional burdens to the poor or middle class.

Any discussions about the budgets for Social Security, Medicare or Medicaid should be separated from discussions involving general revenues and should focus first on the structure of current payroll taxes. It is probably a good thing that we have dedicated payroll deductions for these popular, perhaps essential social programs, the payroll tax structure is very regressive and burdensome to those who make the least. Take FICA for example, where 6.2% of wages up to $106,800, or $6,621, is the maximum individual deduction for Social Security. Social Security could easily be fully funded simply by raising the deduction cap on those making more than $106,800 a year. Kevin Drum in Mother Jones wrote a good piece about this in February of this year entitled "Soaking the Poor, State by State"